Edgar Filing: CADENCE DESIGN SYSTEMS INC

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Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q CDNS 07.04.2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

FORM 10-Q

_____________________________________

(Mark One)



	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 4, 2015



	¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-15867

_____________________________________

CADENCE DESIGN SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)

_____________________________________



Delaware		00-0000000
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2655 Seely Avenue, Building 5, San Jose, California		95134
(Address of Principal Executive Offices)		(Zip Code)

(408) 943-1234

Registrant’s Telephone Number, including Area Code

_____________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

On July 4, 2015, approximately 291,380,000 shares of the registrant’s common stock, $0.01 par value, were outstanding.

CADENCE DESIGN SYSTEMS, INC.

INDEX



		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets: July 4, 2015 and January 3, 2015	1

	Condensed Consolidated Income Statements: Three and Six Months Ended July 4, 2015 and June 28, 2014	2

	Condensed Consolidated Statements of Comprehensive Income: Three and Six Months Ended July 4, 2015 and June 28, 2014	3

	Condensed Consolidated Statements of Cash Flows: Six Months Ended July 4, 2015 and June 28, 2014	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	48

Item 4.	Mine Safety Disclosures	48

Item 5.	Other Information	48

Item 6.	Exhibits	49

	Signatures	50

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



	As of
	July 4, 2015			January 3, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	647,851		$	932,161
Short-term investments	96,560			90,445
Receivables, net	131,325			122,492
Inventories	62,172			56,394
2015 notes hedges	—			523,930
Prepaid expenses and other	129,320			126,313
Total current assets	1,067,228			1,851,735
Property, plant and equipment, net of accumulated depreciation of $569,202 and $552,551, respectively	229,838			230,112
Goodwill	553,831			553,767
Acquired intangibles, net of accumulated amortization of $185,382 and $154,814, respectively	328,338			360,932
Long-term receivables	1,628			3,644
Other assets	199,790			209,366
Total assets	$	2,380,653		$	3,209,556
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Convertible notes	$	—		$	342,499
2015 notes embedded conversion derivative	—			523,930
Accounts payable and accrued liabilities	202,794			225,375
Current portion of deferred revenue	324,569			301,287
Total current liabilities	527,363			1,393,091
Long-term liabilities:
Long-term portion of deferred revenue	36,402			54,726
Long-term debt	348,733			348,676
Other long-term liabilities	70,940			79,489
Total long-term liabilities	456,075			482,891
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock and capital in excess of par value	1,886,421			1,851,427
Treasury stock, at cost	(256,476		)	(203,792		)
Accumulated deficit	(231,989		)	(326,408		)
Accumulated other comprehensive income (loss)	(741		)	12,347
Total stockholders’ equity	1,397,215			1,333,574
Total liabilities and stockholders’ equity	$	2,380,653		$	3,209,556

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended						Six Months Ended
	July 4, 2015			June 28, 2014			July 4, 2015			June 28, 2014
Revenue:
Product and maintenance	$	384,951		$	354,468		$	768,588		$	711,818
Services	30,932			24,320			58,661			45,520
Total revenue	415,883			378,788			827,249			757,338
Costs and expenses:
Cost of product and maintenance	31,715			37,707			73,774			79,904
Cost of services	20,040			16,706			38,566			31,608
Marketing and sales	96,662			98,611			196,930			196,934
Research and development	157,974			152,672			320,970			299,138
General and administrative	27,467			32,042			55,109			60,786
Amortization of acquired intangibles	6,119			5,579			12,350			10,789
Restructuring and other charges (credits)	(498		)	(26		)	3,861			370
Total costs and expenses	339,479			343,291			701,560			679,529
Income from operations	76,404			35,497			125,689			77,809
Interest expense	(8,180		)	(7,369		)	(19,934		)	(14,637		)
Other income, net	1,347			1,635			6,128			5,017
Income before provision for income taxes	69,571			29,763			111,883			68,189
Provision for income taxes	11,411			6,500			17,464			11,856
Net income	$	58,160		$	23,263		$	94,419		$	56,333
Net income per share – basic	$	0.20		$	0.08		$	0.33		$	0.20
Net income per share – diluted	$	0.19		$	0.08		$	0.30		$	0.19
Weighted average common shares outstanding – basic	285,297			283,344			284,910			282,480
Weighted average common shares outstanding – diluted	313,665			305,755			312,756			303,395

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



	Three Months Ended						Six Months Ended
	July 4, 2015			June 28, 2014			July 4, 2015			June 28, 2014
Net income	$	58,160		$	23,263		$	94,419		$	56,333
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustments	(4,528		)	2,377			(13,418		)	6,828
Changes in unrealized holding gains or losses on available-for-sale securities, net of reclassification adjustment for realized gains and losses	(52		)	775			13			595
Changes in defined benefit plan liabilities	26			(21		)	317			387
Total other comprehensive income (loss), net of tax effects	(4,554		)	3,131			(13,088		)	7,810
Comprehensive income	$	53,606		$	26,394		$	81,331		$	64,143

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended
	July 4, 2015			June 28, 2014
Cash and cash equivalents at beginning of period	$	932,161		$	536,260
Cash flows from operating activities:
Net income	94,419			56,333
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	58,963			53,609
Amortization of debt discount and fees	8,971			9,814
Stock-based compensation	43,564			37,941
Gain on investments, net	(1,590		)	(5,128		)
Deferred income taxes	7,097			4,778
Other non-cash items	1,142			3,694
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables	(8,078		)	5,336
Inventories	(6,243		)	(12,266		)
Prepaid expenses and other	(8,036		)	(13,602		)
Other assets	1,117			(1,273		)
Accounts payable and accrued liabilities	(20,653		)	(13,550		)
Deferred revenue	5,827			(23,740		)
Other long-term liabilities	(8,058		)	(4,983		)
Net cash provided by operating activities	168,442			96,963
Cash flows from investing activities:
Purchases of available-for-sale securities	(59,516		)	(77,490		)
Proceeds from the sale of available-for-sale securities	37,586			54,601
Proceeds from the maturity of available-for-sale securities	15,600			23,799
Proceeds from the sale of long-term investments	2,293			—
Purchases of property, plant and equipment	(24,067		)	(17,715		)
Cash paid in business combinations and asset acquisitions, net of cash acquired	—			(163,685		)
Net cash used for investing activities	(28,104		)	(180,490		)
Cash flows from financing activities:
Proceeds from revolving credit facility	—			100,000
Payment of convertible notes	(349,999		)	—
Payment of convertible notes embedded conversion derivative liability	(530,643		)	—
Proceeds from convertible notes hedges	530,643			—
Payment of acquisition-related contingent consideration	—			(1,835		)
Excess tax benefits from stock-based compensation	10,097			2,642
Proceeds from issuance of common stock	38,167			36,482
Stock received for payment of employee taxes on vesting of restricted stock	(15,814		)	(12,292		)
Payments for repurchases of common stock	(93,076		)	(25,032		)
Net cash provided by (used for) financing activities	(410,625		)	99,965
Effect of exchange rate changes on cash and cash equivalents	(14,023		)	4,718
Increase (decrease) in cash and cash equivalents	(284,310		)	21,156
Cash and cash equivalents at end of period	$	647,851		$	557,416

Supplemental cash flow information:
Cash paid for interest	$	12,006		$	4,831
Cash paid for taxes, net	$	16,373		$	10,231
Non-cash investing and financing activities:
Available-for-sale securities received from customer	$	—		$	1,695

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Cadence Design Systems, Inc., or Cadence, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report on Form 10-Q comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These condensed consolidated financial statements are meant to be, and should be, read in conjunction with the consolidated financial statements and the Notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended January 3, 2015. Certain prior period balances have been reclassified to conform to current period presentation.

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q reflect all adjustments (which include only normal, recurring adjustments and those items discussed in these Notes) that are, in the opinion of management, necessary to state fairly the results of operations, cash flows and financial position for the periods and dates presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. Management has evaluated subsequent events through the issuance date of the unaudited condensed consolidated financial statements.

Preparation of the condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2. DEBT

Cadence’s outstanding debt as of July 4, 2015 and January 3, 2015 was as follows:



	July 4, 2015							January 3, 2015
	(In thousands)
	Principal		Unamortized Discount			Carrying Value		Principal		Unamortized Discount			Carrying Value
2015 Notes	$	—	$	—		$	—	$	349,999	$	(7,500	)	$	342,499
2024 Notes	350,000		(1,267		)	348,733		350,000		(1,324		)	348,676
Revolving credit facility	—		—			—		—		—			—
Total outstanding debt	$	350,000	$	(1,267	)	$	348,733	$	699,999	$	(8,824	)	$	691,175

2015 Notes

In June 2010, Cadence issued $350.0 million principal amount of 2.625% Cash Convertible Senior Notes due June 1, 2015, or the 2015 Notes. During the six months ended July 4, 2015, Cadence settled the outstanding principal amount of $350.0 million and paid note holders accrued interest of $3.8 million. The 2015 Notes contained a conversion feature, or the 2015 Notes Embedded Conversion Derivative, that entitled the holders of the notes to receive additional cash payments if the notes were converted prior to maturity. During the six months ended July 4, 2015, Cadence paid $530.6 million to holders of the 2015 notes that converted prior to maturity. Cadence received proceeds of $530.6 million from the 2015 Notes Hedges, which fully offset the additional cash payments associated with the 2015 Notes Embedded Conversion Derivative.

2015 Notes Hedges

Cadence entered into hedge transactions, or the 2015 Notes Hedges, in connection with the issuance of the 2015 Notes. The purpose of the 2015 Notes Hedges was to limit Cadence’s exposure to the additional cash payments above the principal amount of the 2015 Notes that was due to the holders who elected to convert their notes prior to maturity. As a result of the 2015 Notes Hedges, Cadence’s maximum cash exposure upon conversion or maturity of the 2015 Notes was the remaining principal balance of the notes and accrued interest. The 2015 Notes Hedges expired on June 1, 2015, and were settled in cash.

2015 Warrants

At the time of issuance of the 2015 Notes, Cadence entered into separate warrant transactions, or the 2015 Warrants, for the purchase of up to approximately 46.4 million shares of Cadence’s common stock at a strike price of $10.78 per share, for total proceeds of $37.5 million, which was recorded as an increase in stockholders’ equity. As a result of the 2015 Warrants, Cadence experiences dilution to its diluted earnings per share when its average closing stock price exceeds $10.78 for any fiscal quarter until the warrants expire. The 2015 Warrants expire daily over a 70-day period between September and December 2015. Cadence will be required to issue shares of common stock to the purchasers of the 2015 Warrants that represent the value by which the specified daily volume weighted average price of Cadence’s common stock exceeds the strike price of $10.78 stipulated in the warrant agreements.

2015 Notes Interest Expense

The effective interest rate and components of interest expense of the 2015 Notes for the three and six months ended July 4, 2015 and June 28, 2014 were as follows:



	Three Months Ended						Six Months Ended
	July 4, 2015			June 28, 2014			July 4, 2015			June 28, 2014
	(In thousands, except percentages)
Effective interest rate	8.1		%	8.1		%	8.1		%	8.1		%
Contractual interest expense	$	1,178		$	2,289		$	2,987		$	4,578
Amortization of debt discount	$	2,470		$	4,275		$	7,500		$	8,507

2024 Notes

In October 2014, Cadence issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024, or the 2024 Notes. Cadence received net proceeds of $342.4 million from issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Both the discount and issuance costs will be amortized to interest expense over the term of the 2024 Notes using the effective interest method. Interest is payable in cash semi-annually in April and October. The 2024 Notes are unsecured and rank equal in right of payment to all of Cadence’s existing and future senior indebtedness.

Cadence may redeem the 2024 Notes, in whole or in part, at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled payments of principal and interest, plus any accrued and unpaid interest, as more particularly described in the indenture governing the 2024 Notes.

The indenture governing the 2024 Notes includes customary representations, warranties and restrictive covenants, including, but not limited to, restrictions on our ability to grant liens on assets, enter into sale and lease-back transactions, or merge, consolidate or sell assets, and also includes customary events of default.

Revolving Credit Facility

Cadence maintains a senior unsecured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent. The credit facility provides for borrowings up to $250.0 million, with the right to request increased capacity up to an additional $150.0 million upon the receipt of lender commitments, for total maximum borrowings of $400.0 million. The credit facility, as amended, expires on September 19, 2019 and has no subsidiary guarantors. Any outstanding loans drawn under the credit facility are due at maturity on September 19, 2019. Outstanding borrowings may be paid at any time prior to maturity.

Interest accrues on borrowings under the credit facility at either LIBOR plus a margin between 1.25% and 2.0% per annum or at the base rate plus a margin between 0.25% and 1.0% per annum. The interest rate applied to borrowings is determined by Cadence’s consolidated leverage ratio as specified by the credit facility agreement. Interest is payable quarterly. A commitment fee ranging from 0.20% to 0.35% is assessed on the daily average undrawn portion of revolving commitments.

The credit facility contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens, make certain investments (including acquisitions), dispose of certain assets and make certain payments, including share repurchases and dividends. In addition, the credit facility contains financial covenants that require Cadence to maintain a leverage ratio not to exceed 2.75 to 1, and a minimum interest coverage ratio of 3 to 1.

As of July 4, 2015 and January 3, 2015, Cadence had no outstanding balance under the revolving credit facility and was in compliance with all financial covenants.

NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS

Cadence’s cash, cash equivalents and short-term investments at fair value as of July 4, 2015 and January 3, 2015 were as follows:



	As of
	July 4, 2015		January 3, 2015
	(In thousands)
Cash and cash equivalents	$	647,851	$	932,161
Short-term investments	96,560		90,445
Cash, cash equivalents and short-term investments	$	744,411	$	1,022,606

Cash and Cash Equivalents

Cadence considers all highly liquid investments with original maturities of three months or less on the date of purchase to be cash equivalents. The amortized cost of Cadence’s cash equivalents approximates fair value. The following table summarizes Cadence’s cash and cash equivalents at fair value as of July 4, 2015 and January 3, 2015:



	As of
	July 4, 2015		January 3, 2015
	(In thousands)
Cash and interest bearing deposits	$	232,408	$	203,665
Money market funds	415,443		728,496
Total cash and cash equivalents	$	647,851	$	932,161

Short-Term Investments

The following tables summarize Cadence’s short-term investments as of July 4, 2015 and January 3, 2015:



	As of July 4, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Corporate debt securities	$	36,272	$	8	$	(22	)	$	36,258
Bank certificates of deposit	13,100		7		—			13,107
United States Treasury securities	33,972		69		(1		)	34,040
United States government agency securities	7,157		2		—			7,159
Commercial paper	4,188		7		—			4,195
Marketable debt securities	94,689		93		(23		)	94,759
Marketable equity securities	1,817		—		(16		)	1,801
Total short-term investments	$	96,506	$	93	$	(39	)	$	96,560



	As of January 3, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Corporate debt securities	$	34,919	$	6	$	(31	)	$	34,894
Bank certificates of deposit	21,900		10		—			21,910
United States Treasury securities	19,375		12		(13		)	19,374
United States government agency securities	9,209		3		(4		)	9,208
Commercial paper	3,184		4		(2		)	3,186
Marketable debt securities	88,587		35		(50		)	88,572
Marketable equity securities	1,817		56		—			1,873
Total short-term investments	$	90,404	$	91	$	(50	)	$	90,445

As of July 4, 2015, no securities held by Cadence had been in an unrealized loss position for more than 6 months.

The amortized cost and estimated fair value of marketable debt securities included in short-term investments as of July 4, 2015, by contractual maturity, are shown in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.



	Amortized Cost		Fair Value
	(In thousands)
Due in less than one year	$	52,956	$	52,990
Due in one to three years	41,733		41,769
Total marketable debt securities included in short-term investments	$	94,689	$	94,759

Realized gains and losses from the sale of marketable debt and equity securities are recorded in other income, net in the condensed consolidated income statements.

NOTE 4. FAIR VALUE

Inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Cadence’s market assumptions. These two types of inputs have created the following fair value hierarchy:


•	Level 1 – Quoted prices for identical instruments in active markets;


•	Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and


•	Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the six months ended July 4, 2015.

On a quarterly basis, Cadence measures at fair value certain financial assets and liabilities. The fair value of financial assets and liabilities was determined using the following levels of inputs as of July 4, 2015 and January 3, 2015:



	Fair Value Measurements as of July 4, 2015:
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	415,443	$	415,443	$	—	$	—
Short-term investments:
Corporate debt securities	36,258		—		36,258		—
Bank certificates of deposit	13,107		—		13,107		—
United States Treasury securities	34,040		34,040		—		—
United States government agency securities	7,159		7,159		—		—
Commercial paper	4,195		—		4,195		—
Marketable equity securities	1,801		1,801		—		—
Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust	24,226		24,226		—		—
Total Assets	$	536,229	$	482,669	$	53,560	$	—

	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Foreign currency exchange contracts	536		—		536		—
Total Liabilities	$	536	$	—	$	536	$	—




	Fair Value Measurements as of January 3, 2015:
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	728,496	$	728,496	$	—	$	—
Short-term investments:
Corporate debt securities	34,894		—		34,894		—
Bank certificates of deposit	21,910		—		21,910		—
United States Treasury securities	19,374		19,374		—		—
United States government agency securities	9,208		9,208		—		—
Commercial paper	3,186		—		3,186		—
Marketable equity securities	1,873		1,873		—		—
Trading securities held in NQDC trust	27,034		27,034		—		—
2015 Notes Hedges	523,930		—		523,930		—
Total Assets	$	1,369,905	$	785,985	$	583,920	$	—

	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
2015 Notes Embedded Conversion Derivative	523,930		—		523,930		—
Foreign currency exchange contracts	3,163		—		3,163		—
Total Liabilities	$	527,093	$	—	$	527,093	$	—

NOTE 5. RECEIVABLES, NET

Cadence’s current and long-term receivables balances as of July 4, 2015 and January 3, 2015 were as follows:



	As of
	July 4, 2015		January 3, 2015
	(In thousands)
Accounts receivable	$	85,007	$	79,410
Unbilled accounts receivable	46,318		43,082
Long-term receivables	1,628		3,644
Total receivables	$	132,953	$	126,136
Less allowance for doubtful accounts	—		—
Total receivables, net	$	132,953	$	126,136

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of July 4, 2015, one customer accounted for approximately 19% of Cadence’s total receivables and no other customer accounted for 10% or more of Cadence’s receivables. As of January 3, 2015, no one customer accounted for 10% or more of Cadence’s total receivables. As of July 4, 2015 and January 3, 2015, Cadence’s receivables attributable to the ten customers with the largest balances were approximately 48% and 43% of Cadence's total receivables, respectively.

NOTE 6. GOODWILL AND ACQUIRED INTANGIBLES

Goodwill

The changes in the carrying amount of goodwill during the six months ended July 4, 2015 were as follows:



	Gross Carrying Amount
	(In thousands)
Balance as of January 3, 2015	$	553,767
Effect of foreign currency translation	64
Balance as of July 4, 2015	$	553,831

Acquired Intangibles, Net

Acquired intangibles as of July 4, 2015 were as follows, excluding intangibles that were fully amortized as of January 3, 2015:



	Gross Carrying Amount		Accumulated Amortization			Acquired Intangibles, Net
	(In thousands)
Existing technology	$	328,447	$	(104,637	)	$	223,810
Agreements and relationships	173,554		(75,905		)	97,649
Tradenames, trademarks and patents	10,119		(4,840		)	5,279
Total acquired intangibles with definite lives	512,120		(185,382		)	326,738
In-process technology	1,600		—			1,600
Total acquired intangibles	$	513,720	$	(185,382	)	$	328,338

In-process technology as of July 4, 2015 consisted of acquired projects that, if completed, will contribute to Cadence’s ability to offer additional software solutions to its customers. As of July 4, 2015, these projects were expected to be complete in three to six months. During the six months ended July 4, 2015, there were no transfers from in-process technology to existing technology.

Acquired intangibles as of January 3, 2015 were as follows, excluding intangibles that were fully amortized as of December 28, 2013:



	Gross Carrying Amount		Accumulated Amortization			Acquired Intangibles, Net
	(In thousands)
Existing technology	$	328,325	$	(84,822	)	$	243,503
Agreements and relationships	175,202		(65,512		)	109,690
Tradenames, trademarks and patents	10,619		(4,480		)	6,139
Total acquired intangibles with definite lives	514,146		(154,814		)	359,332
In-process technology	1,600		—			1,600
Total acquired intangibles	$	515,746	$	(154,814	)	$	360,932

Amortization expense from existing technology and maintenance agreements is included in cost of product and maintenance. Amortization of acquired intangibles for the three and six months ended July 4, 2015 and June 28, 2014 was as follows:



	Three Months Ended				Six Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014
	(In thousands)
Cost of product and maintenance	$	10,105	$	8,613	$	20,278	$	16,189
Amortization of acquired intangibles	6,119		5,579		12,350		10,789
Total amortization of acquired intangibles	$	16,224	$	14,192	$	32,628	$	26,978

Estimated amortization expense for intangible assets with definite lives for the following five fiscal years and thereafter is as follows:



	(In thousands)
2015 – remaining period	$	31,600
2016	57,330
2017	52,627
2018	48,944
2019	42,935
Thereafter	93,302
Total estimated amortization expense	$	326,738

NOTE 7. STOCK-BASED COMPENSATION

Stock-based compensation expense is reflected in Cadence’s condensed consolidated income statements for the three and six months ended July 4, 2015 and June 28, 2014 as follows:



	Three Months Ended				Six Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014
	(In thousands)
Cost of product and maintenance	$	558	$	485	$	1,127	$	967
Cost of services	815		709		1,647		1,412
Marketing and sales	5,236		4,560		10,683		9,156
Research and development	11,401		9,701		22,778		19,368
General and administrative	3,693		3,622		7,329		7,038
Total stock-based compensation expense	$	21,703	$	19,077	$	43,564	$	37,941

Cadence had total unrecognized compensation expense, net of estimated forfeitures, related to stock option and restricted stock grants of $114.9 million as of July 4, 2015, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 1.9 years.

NOTE 8. RESTRUCTURING AND OTHER CHARGES

Cadence has initiated various restructuring plans in an effort to better align its resources with its business strategy. These restructuring plans have primarily been comprised of severance payments and termination benefits related to headcount reductions, estimated lease losses related to facilities vacated under the restructuring plans and charges related to assets abandoned as part of the restructuring plans. During the six months ended July 4, 2015, Cadence initiated a restructuring plan, or the 2015 Restructuring Plan, and recorded restructuring and other charges of approximately $3.9 million related to severance payments and termination benefits. As of July 4, 2015, total liabilities related to the 2015 Restructuring Plan were $1.6 million. Cadence expects to make cash payments for severance and related benefits for the 2015 Restructuring Plan through the fourth quarter of fiscal 2016.

The following table presents activity relating to Cadence’s restructuring plans during the six months ended July 4, 2015:



	Severance and Benefits			Excess Facilities			Other		Total
	(In thousands)
Balance, January 3, 2015	$	4,462		$	1,267		$	481	$	6,210
Restructuring and other charges (credits):
2015 Restructuring Plan	3,862			—			—		3,862
Prior restructuring plans	(559		)	558			—		(1		)
Cash payments	(5,832		)	(428		)	—		(6,260		)
Effect of foreign currency translation	(16		)	(41		)	—		(57		)
Balance, July 4, 2015	$	1,917		$	1,356		$	481	$	3,754

The remaining accrual for Cadence’s restructuring plans is recorded in the condensed consolidated balance sheet as follows:



	As of
	July 4, 2015
	(In thousands)
Accounts payable and accrued liabilities	$	3,549
Other long-term liabilities	205
Total liabilities	$	3,754

NOTE 9. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income during the period by the weighted average number of shares of common stock outstanding during that period, less unvested restricted stock awards. Diluted net income per share is impacted by equity instruments considered to be potential common shares, if dilutive, computed using the treasury stock method of accounting.

The calculations for basic and diluted net income per share for the three and six months ended July 4, 2015 and June 28, 2014 are as follows:



	Three Months Ended				Six Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014
	(In thousands, except per share amounts)
Net income	$	58,160	$	23,263	$	94,419	$	56,333
Weighted average common shares used to calculate basic net income per share	285,297		283,344		284,910		282,480
2015 Warrants	20,635		15,054		19,773		13,815
Stock-based awards	7,733		7,357		8,073		7,100
Weighted average common shares used to calculate diluted net income per share	313,665		305,755		312,756		303,395
Net income per share - basic	$	0.20	$	0.08	$	0.33	$	0.20
Net income per share - diluted	$	0.19	$	0.08	$	0.30	$	0.19

The following table presents shares of Cadence’s common stock outstanding for the three and six months ended July 4, 2015 and June 28, 2014 that were excluded from the computation of diluted net income per share because the effect of including these shares in the computation of diluted net income per share would have been anti-dilutive:



	Three Months Ended		Six Months Ended
	July 4, 2015	June 28, 2014	July 4, 2015	June 28, 2014
	(In thousands)
Options to purchase shares of common stock	1,503	4,399	1,308	4,517
Non-vested shares of restricted stock	23	8	18	9
Total potential common shares excluded	1,526	4,407	1,326	4,526

NOTE 10. STOCK REPURCHASE PROGRAMS

In February 2008, Cadence’s Board of Directors authorized Cadence to repurchase shares of its common stock in the open market with a value of up to $500.0 million in the aggregate. In August 2008, Cadence’s Board of Directors authorized Cadence to repurchase shares of its common stock in the open market with a value of up to an additional $500.0 million in the aggregate. In July 2015, Cadence’s Board of Directors authorized the addition of $578.8 million in the aggregate to the amounts remaining under the prior authorizations, with $1.2 billion remaining under the authorizations as of July 4, 2015.

In July 2015, Cadence’s Board of Directors replaced the two-year, aggregate $450.0 million stock repurchase plan that commenced in the second quarter of fiscal 2015 with an 18-month plan to repurchase shares of Cadence common stock of up to an aggregate of $1.2 billion under the authorizations, beginning in the third quarter of fiscal 2015. The actual timing and amount of repurchases will be subject to business and market conditions, corporate and regulatory requirements, acquisition opportunities and other factors. The stock repurchase program may be suspended, modified or discontinued at any time.

The shares repurchased and the total cost of repurchased shares, including commissions, during the three and six months ended July 4, 2015 and June 28, 2014 were as follows:



	Three Months Ended				Six Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014
	(In thousands)
Shares repurchased	2,887		768		4,889		1,595
Total cost of repurchased shares	$	56,279	$	12,515	$	93,076	$	25,032

For an additional information regarding share repurchases, see the discussion under Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”

NOTE 11. CONTINGENCIES

Legal Proceedings

From time to time, Cadence is involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, indemnification obligations, mergers and acquisitions, licensing, contracts, distribution arrangements and employee relations matters. At least quarterly, Cadence reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on Cadence’s judgments using the best information available at the time. As additional information becomes available, Cadence reassesses the potential liability related to pending claims and litigation matters and may revise estimates.

Other Contingencies

Cadence provides its customers with a warranty on sales of hardware products, generally for a 90-day period. Cadence did not incur any significant costs related to warranty obligations during the three and six months ended July 4, 2015 and June 28, 2014.

Cadence’s product license and services agreements typically include a limited indemnification provision for claims from third parties relating to Cadence’s intellectual property. If the potential loss from any indemnification claim is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. The indemnification is generally limited to the amount paid by the customer. Cadence did not incur any significant losses from indemnification claims during the three and six months ended July 4, 2015 and June 28, 2014.

NOTE 12. OTHER COMPREHENSIVE INCOME (LOSS)

Cadence’s other comprehensive income (loss) is comprised of foreign currency translation gains and losses, changes in defined benefit plan liabilities, and changes in unrealized holding gains and losses on available-for-sale securities net of reclassifications for realized gains and losses, as presented in Cadence’s condensed consolidated statements of comprehensive income.

Accumulated other comprehensive income (loss) was comprised of the following as of July 4, 2015, and January 3, 2015:



	As of
	July 4, 2015			January 3, 2015
	(In thousands)
Foreign currency translation gain	$	2,289		$	15,707
Changes in defined benefit plan liabilities	(3,084		)	(3,401		)
Unrealized holding gains on available-for-sale securities	54			41
Total accumulated other comprehensive income (loss)	$	(741	)	$	12,347

For the three and six months ended July 4, 2015 and June 28, 2014 there were no significant amounts reclassified from accumulated other comprehensive income (loss) to net income.

NOTE 13. SEGMENT REPORTING

Segment reporting is based on the “management approach,” following the method that management organizes the company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. Cadence’s chief operating decision maker is its President and Chief Executive Officer, or CEO, who reviews Cadence’s consolidated results as one operating segment. In making operating decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geographic region.

Outside the United States, Cadence markets and supports its products and services primarily through its subsidiaries. Revenue is attributed to geography based upon the country in which the product is used or services are delivered. Long-lived assets are attributed to geography based on the country where the assets are located.

The following table presents a summary of revenue by geography for the three and six months ended July 4, 2015 and June 28, 2014:



	Three Months Ended				Six Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014
	(In thousands)
Americas:
United States	$	192,176	$	161,874	$	379,383	$	325,202
Other Americas	7,425		6,050		12,839		11,834
Total Americas	199,601		167,924		392,222		337,036
Asia	96,426		88,286		195,208		175,302
Europe, Middle East and Africa	82,014		82,074		160,584		159,606
Japan	37,842		40,504		79,235		85,394
Total	$	415,883	$	378,788	$	827,249	$	757,338

The following table presents a summary of long-lived assets by geography as of July 4, 2015 and January 3, 2015:



	As of
	July 4, 2015		January 3, 2015
	(In thousands)
Americas:
United States	$	194,071	$	200,760
Other Americas	448		578
Total Americas	194,519		201,338
Asia	22,846		22,145
Europe, Middle East and Africa	11,870		5,951
Japan	603		678
Total	$	229,838	$	230,112

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, or this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 3, 2015. This Quarterly Report contains statements that are not historical in nature, are predictive, or that depend upon or refer to future events or conditions or contain forward-looking statements. Statements including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the “Risk Factors,” “Results of Operations,” “Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, and the risks discussed in our other Securities Exchange Commission, or SEC, filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.

Overview

We develop system design enablement, or SDE, solutions that our customers use to design whole electronics systems and increasingly small and complex integrated circuits, or ICs, and electronic devices. Our solutions are designed to help our customers reduce the time to bring an electronics system, IC or electronic device to market and to reduce their design, development and manufacturing costs. Our SDE product offerings include electronic design automation, or EDA, software, emulation and prototyping hardware, and two categories of intellectual property, or IP, commonly referred to as verification IP, or VIP, and design IP. We provide maintenance for our software, emulation hardware, and IP product offerings. We also provide engineering services related to methodology, education, hosted design solutions and design services for advanced ICs and development of custom IP. These services help our customers manage and accelerate their electronics product development processes.

Our customers include electronics systems and semiconductor companies, internet service providers and other technology companies that deliver a wide range of electronics products in a number of market segments, such as mobile and consumer devices, communications, cloud and data center infrastructure, personal computers, automotive systems, medical systems, and other devices. The renewal of many of our customer contracts and our customers’ decisions to make new purchases from us are dependent upon our customers’ commencement of new design projects. As a result, our business is significantly influenced by our customers’ business outlook and investment in new designs and products.

Our future performance depends on our ability to innovate, commercialize newly developed solutions and enhance and maintain our current products. We must keep pace with our customers’ technical developments, satisfy industry standards and meet our customers’ increasingly demanding performance, productivity, quality and predictability requirements. We expect to continue to invest in research and development and customer and partner relationships.

We combine our products and technologies into categories related to major design activities:


•	Functional Verification, including Emulation Hardware;


•	Digital IC Design and Signoff;


•	Custom IC Design;


•	System Interconnect and Analysis; and


•	IP.

The products and technologies included in these categories are combined with ready-to-use packages of technologies assembled from our broad portfolio of IP and other associated components that provide comprehensive solutions for low power, mixed signal and designs at smaller geometries referred to as advanced process nodes, as well as popular designs based on design IP owned and licensed by other companies. These solutions are marketed to users who specialize in areas such as system design and verification, functional verification, logic design, digital implementation, custom IC design and verification, printed circuit board, or PCB, IC package and system-in-package design and analysis.

For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Products and Product Strategy,” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.

We have identified certain items that management uses as performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items further below under the headings “Results of Operations” and “Liquidity and Capital Resources.”

Critical Accounting Estimates

In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. For further information about our critical accounting estimates, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.

New Accounting Standards

In May 2014, the Financial Accounting Standards Board, or FASB, issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under United States generally accepted accounting principles. The new standard will become effective for us in the first quarter of fiscal 2018 and permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

In April 2015, the FASB issued a new accounting standard requiring debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The new standard will become effective for us in the first quarter of fiscal 2016 and requires retrospective application. Adoption of this standard will not have a material impact on our financial position.

In April 2015, the FASB also issued a new accounting standard that provides explicit guidance with respect to accounting for fees paid in a cloud computing arrangement. The new standard will become effective for us in the first quarter of fiscal 2016 and allows for prospective or retrospective application. We are currently evaluating the effect that the standard will have on our consolidated financial statements.

We periodically review new accounting standards. Although some of the accounting standards that have been issued may be applicable to us, we have not identified any other new accounting standards that would have a significant impact on our consolidated financial statements.

Results of Operations

Financial results for the three and six months ended July 4, 2015, as compared to the three and six months ended June 28, 2014, reflect the following:


•	increased product and maintenance revenue, primarily because of increased business levels and incremental revenue recognized from our fiscal 2014 acquisitions;


•	continued investment in research and development activities;


•	favorable changes in foreign currency exchange rates on our operating expenses;


•	decreased acquisition-related costs;


•	increased stock-based compensation; and


•	increased amortization of acquired intangibles resulting from our fiscal 2014 acquisitions.

Revenue

We primarily generate revenue from licensing our software and IP, selling or leasing our emulation hardware technology, providing maintenance for our software, emulation hardware and IP, providing engineering services and earning royalties generated from the use of our IP. The timing of our revenue is significantly affected by the mix of software, emulation hardware and IP products in the bookings executed in any given period and whether the revenue for such bookings is recognized in a recurring manner over multiple periods or up front, upon completion of delivery.

We seek to achieve a consistent revenue mix such that approximately 90% of our revenue is recurring in nature, and the remainder of the resulting revenue is recognized up front, upon completion of delivery. Recurring revenue includes revenue from our license arrangements where revenue is recognized over multiple periods, services, royalties from certain IP arrangements, maintenance on perpetual software licenses and emulation hardware, and our operating leases of emulation hardware. Upfront revenue is primarily generated by our sales of emulation hardware and perpetual software licenses. Our ability to achieve this mix in any single fiscal period may be impacted primarily by hardware sales.

For an additional description of the impact of emulation hardware sales on the timing of revenue recognition, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates – Revenue Recognition” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.

Revenue by Period

The following table shows our revenue for the three months ended July 4, 2015 and June 28, 2014 and the change in revenue between periods:



	Three Months Ended				Change
	July 4, 2015		June 28, 2014		Amount		Percentage
	(In millions, except percentages)
Product and maintenance	$	385.0	$	354.5	$	30.5	9	%
Services	30.9		24.3		6.6		27	%
Total revenue	$	415.9	$	378.8	$	37.1	10	%

The following table shows our revenue for the six months ended July 4, 2015 and June 28, 2014 and the change in revenue between periods:



	Six Months Ended				Change
	July 4, 2015		June 28, 2014		Amount		Percentage
	(In millions, except percentages)
Product and maintenance	$	768.6	$	711.8	$	56.8	8	%
Services	58.6		45.5		13.1		29	%
Total revenue	$	827.2	$	757.3	$	69.9	9	%

Product and maintenance revenue increased during the three and six months ended July 4, 2015, as compared to the three and six months ended June 28, 2014, primarily because of increased business levels and incremental revenue recognized from our fiscal 2014 acquisitions. Services revenue also increased during the three and six months ended July 4, 2015 due to increased demand for our IP offerings. Services revenue may fluctuate from period to period based on demand for, and our resources to fulfill, our services and IP offerings.

No one customer accounted for 10% or more of total revenue during the three and six months ended July 4, 2015 or June 28, 2014.

Revenue by Product Group

The following table shows the percentage of revenue contributed by each of our five product groups for the past five consecutive quarters:



	Three Months Ended
	June 28, 2014		September 27, 2014		January 3, 2015		April 4, 2015		July 4, 2015
Functional Verification, including Emulation Hardware	21	%	23	%	21	%	23	%	21	%
Digital IC Design and Signoff	30	%	29	%	28	%	28	%	29	%
Custom IC Design	28	%	27	%	28	%	27	%	27	%
System Interconnect and Analysis	11	%	10	%	11	%	11	%	11	%
IP	10	%	11	%	12	%	11	%	12	%
Total	100	%	100	%	100	%	100	%	100	%

As described in Note 2 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015, certain of our licensing arrangements allow customers the ability to remix among software products. Additionally, we have arrangements with customers that include a combination of our products, with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, we estimate the allocation of the revenue to product groups based upon the expected usage of our products. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the table above would differ.

Revenue by Geography



	Three Months Ended				Change
	July 4, 2015		June 28, 2014		Amount			Percentage
	(In millions, except percentages)
United States	$	192.2	$	161.9	$	30.3		19	%
Other Americas	7.4		6.1		1.3			21	%
Asia	96.4		88.3		8.1			9	%
Europe, Middle East and Africa	82.0		82.1		(0.1		)	—	%
Japan	37.9		40.4		(2.5		)	(6	)%
Total revenue	$	415.9	$	378.8	$	37.1		10	%



	Six Months Ended				Change
	July 4, 2015		June 28, 2014		Amount			Percentage
	(In millions, except percentages)
United States	$	379.4	$	325.2	$	54.2		17	%
Other Americas	12.8		11.8		1.0			8	%
Asia	195.2		175.3		19.9			11	%
Europe, Middle East and Africa	160.6		159.6		1.0			1	%
Japan	79.2		85.4		(6.2		)	(7	)%
Total revenue	$	827.2	$	757.3	$	69.9		9	%

Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies, primarily the Japanese yen. We recognize reduced revenue from those contracts in periods when the Japanese yen weakens in value against the United States dollar and additional revenue from those contracts in periods when the Japanese yen strengthens against the United States dollar. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion under Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”

Revenue for Japan decreased during the three and six months ended July 4, 2015, as compared to the three and six months ended June 28, 2014, primarily due to continued depreciation of the Japanese yen as well as difficult business conditions facing many of our Japanese customers.

For the primary factors contributing to the increase in revenue in other geographies, see the general description under “Revenue by Period,” above.

Revenue by Geography as a Percent of Total Revenue



	Three Months Ended				Six Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014
United States	46	%	43	%	46	%	43	%
Other Americas	2	%	1	%	1	%	2	%
Asia	23	%	23	%	24	%	23	%
Europe, Middle East and Africa	20	%	22	%	19	%	21	%
Japan	9	%	11	%	10	%	11	%
Total	100	%	100	%	100	%	100	%

Cost of Revenue



	Three Months Ended				Change
	July 4, 2015		June 28, 2014		Amount			Percentage
	(In millions, except percentages)
Cost of product and maintenance	$	31.7	$	37.7	$	(6.0	)	(16	)%
Cost of services	20.0		16.7		3.3			20	%



	Six Months Ended				Change
	July 4, 2015		June 28, 2014		Amount			Percentage
	(In millions, except percentages)
Cost of product and maintenance	$	73.8	$	79.9	$	(6.1	)	(8	)%
Cost of services	38.6		31.6		7.0			22	%

Cost of Product and Maintenance

Cost of product and maintenance includes costs associated with the sale and lease of our emulation hardware and licensing of our software and IP products, certain employee salary and benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, as well as the costs of technical documentation and royalties payable to third-party vendors. Costs associated with our emulation hardware products include materials, assembly, applicable reserves and overhead. These additional hardware manufacturing costs make our cost of emulation hardware product higher, as a percentage of revenue, than our cost of software and IP products.

A summary of cost of product and maintenance is as follows:



	Three Months Ended				Change
	July 4, 2015		June 28, 2014		Amount			Percentage
	(In millions, except percentages)
Product and maintenance-related costs	$	21.6	$	29.1	$	(7.5	)	(26	)%
Amortization of acquired intangibles	10.1		8.6		1.5			17	%
Total cost of product and maintenance	$	31.7	$	37.7	$	(6.0	)	(16	)%



	Six Months Ended				Change
	July 4, 2015		June 28, 2014		Amount			Percentage
	(In millions, except percentages)
Product and maintenance-related costs	$	53.5	$	63.7	$	(10.2	)	(16	)%
Amortization of acquired intangibles	20.3		16.2		4.1			25	%
Total cost of product and maintenance	$	73.8	$	79.9	$	(6.1	)	(8	)%

Cost of product and maintenance depends primarily upon our emulation hardware product sales and gross margins in any given period. Cost of product and maintenance is also affected by employee salary and benefits and other employee-related costs, as well as the timing and extent to which we acquire intangible assets, acquire or license third-parties’ intellectual property or technology and sell our products that include such acquired or licensed intellectual property or technology.

The changes in product and maintenance-related costs for the three and six months ended July 4, 2015, as compared to the three and six months ended June 28, 2014, were due to the following:



	Change
	Three Months Ended			Six Months Ended
	(In millions)
Emulation hardware costs	$	(8.0	)	$	(12.5	)
Materials and other pre-production costs	0.9			1.7
Other items	(0.4		)	0.6
	$	(7.5	)	$	(10.2	)

Emulation hardware costs decreased during the three and six months ended July 4, 2015, as compared to the three and six months ended June 28, 2014, due to a lower volume of emulation hardware products sold. Gross margins on our emulation hardware products may fluctuate based on customer pricing strategies, product competition and product life cycle.

Amortization of acquired intangibles included in cost of product and maintenance increased during the three and six months ended July 4, 2015, as compared to the three and six months ended June 28, 2014, primarily due to the increase in amortization of intangible assets associated with our fiscal 2014 acquisitions. For an additional description of our expected amortization of intangible assets, see Note 6 in the notes to condensed consolidated financial statements.

Cost of Services

Cost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects, costs to maintain the infrastructure necessary to manage a services organization, and provisions for contract losses, if any. Cost of services will fluctuate from period to period based on our utilization of design services engineers on revenue-generating projects or on internal development projects. Cost of services increased during the three and six months ended July 4, 2015, as compared to the three and six months ended June 28, 2014, primarily due to an overall increase in services revenue and the resources required to meet the demand for our services and IP offerings.

Operating Expenses

Our operating expenses include marketing and sales, research and development and general and administrative expenses. Factors that cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, foreign exchange rates, stock-based compensation and the impact of our variable compensation programs that are driven by overall operating results. During fiscal 2014, we initiated a voluntary early retirement program. The program was offered to certain eligible employees in North America and Japan. Costs associated with this program were recorded in our operating expenses during fiscal 2014.

Stock-based compensation included in operating expenses increased by approximately $2.4 million during the three months ended July 4, 2015, as compared to the three months ended June 28, 2014, and $5.2 million during the six months ended July 4, 2015, as compared to the six months ended June 28, 2014. The increase in stock-based compensation is primarily due to higher grant-date fair values of stock awards.

Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. During the three and six months ended July 4, 2015, as compared to the three and six months ended June 28, 2014, we experienced a favorable impact on expenses as a result of the strengthening value of the United States dollar against other currencies, including the European Union euro and the Japanese yen. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion in Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”

Our operating expenses for the three and six months ended July 4, 2015 and June 28, 2014 were as follows:



	Three Months Ended				Change
	July 4, 2015		June 28, 2014		Amount			Percentage
	(In millions, except percentages)
Marketing and sales	$	96.7	$	98.6	$	(1.9	)	(2	)%
Research and development	158.0		152.7		5.3			3	%
General and administrative	27.5		32.0		(4.5		)	(14	)%
Total operating expenses	$	282.2	$	283.3	$	(1.1	)	—	%



	Six Months Ended				Change
	July 4, 2015		June 28, 2014		Amount			Percentage
	(In millions, except percentages)
Marketing and sales	$	196.9	$	196.9	$	—		—	%
Research and development	321.0		299.1		21.9			7	%
General and administrative	55.1		60.8		(5.7		)	(9	)%
Total operating expenses	$	573.0	$	556.8	$	16.2		3	%

Our operating expenses, as a percentage of total revenue, for the three and six months ended July 4, 2015 and June 28, 2014 were as follows:



	Three Months Ended				Six Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014
Marketing and sales	23	%	26	%	24	%	26	%
Research and development	38	%	40	%	39	%	39	%
General and administrative	7	%	8	%	7	%	8	%
Total operating expenses	68	%	74	%	70	%	73	%

Marketing and Sales

The changes in marketing and sales expense for the three and six months ended July 4, 2015, as compared to the three and six months ended June 28, 2014, were due to the following:



	Change
	Three Months Ended			Six Months Ended
	(In millions)
Salary, benefits and other employee-related costs	$	0.9		$	2.0
Stock-based compensation	0.7			1.5
Professional services	(0.8		)	(1.3		)
Severance and other termination costs, including voluntary early retirement program	(1.9		)	(1.9		)
Other items	(0.8		)	(0.3		)
	$	(1.9	)	$	—

Research and Development

The changes in research and development expense for the